Drafting Sale of Immovable Property Agreements – Part 1
14 Jul 2020
Important considerations
This article is the second article in a series of articles on the drafting of agreements relating to immovable property. The first article – The CPA and drafting of agreements relating to Immovable Property, provides a general oversight on the impact the CPA has on the drafting of agreements relating to immovable property. We suggest that you first have a look at the first article on the drafting of agreements relating to immovable property before you proceed with this article.
1. ALIENATION OF LAND ACT AND ECTA
Section 2 of the Alienation of Land Act, 1981, provides that a deed of alienation must be used when entering into an agreement relating to the sale of Immovable Property and must be signed by the parties thereto or by their agents acting on their written authority.
It is not possible to conclude a sale of Immovable Property by way of a verbal agreement. Furthermore, section 4 (4) of the Electronic Communications and Transactions Act, 2002, provides that an Agreement for the alienation of Immovable Property cannot be signed by electronic signature (this includes advanced electronic signatures).
2. MATRIMONIAL PROPERTY ACT
If the Seller is a natural person, it is important to determine the marital status of the Seller. If the Seller is married in community of property, section 15 of the Matrimonial Property Act, 1984, may apply.
Section 15 (2) (b) of the Matrimonial Property Act, 1984, determines that a spouse married in community of property shall not without the written consent of the other spouse enter into any contract for the alienation, mortgaging, burdening with a servitude or conferring of any other real right in immovable property forming part of the joint estate.
3. APPROVAL BY THE SHAREHOLDERS OF THE SELLER
If the Seller is a Company, you will need to establish if the Seller is disposing of all or the greater part of its assets or undertakings.
Section 1 of the Companies Act, 2008, provides that –
“all or the greater part of the assets or undertaking”, when used in respect of a company, means—
(a) in the case of the company’s assets, more than 50% of its gross assets fairly valued, irrespective of its liabilities; or
(b) in the case of the company’s undertaking, more than 50% of the value of its entire undertaking, fairly valued;
If one of the exclusions stipulated in section 112 (1) of the Companies Act, 2008, does not apply, the shareholders of the Seller will need to approve the transaction if the Seller is selling all or greater part of its assets or undertakings.
It is also essential to consider whether the Seller is a subsidiary of a holding company, and if so, whether the disposal by the Seller (being the subsidiary), constitutes disposal of all or the greater part of the assets or undertakings of the holding company with regard to the consolidated financial statements of the holding company.
If the disposal also constitutes disposal of all or the greater part of the assets of the holding company, then the shareholders of the holding company will also need to approve the transaction by way of a special resolution.
4. TAKEOVER REGULATION PANEL (“TRP”)
TRP approval is sometimes overlooked because parties are under the incorrect impression that because it is not a high-value transaction, there is no need for TRP approval.
Small and medium companies seldom expressly stipulate in their MOI that Part B, C and the Takeover Regulations must apply to it. This, however, does not mean that part B, C and the Takeover Regulations will not apply.
If the transaction constitutes disposal of all or the greater part of the Sellers assets as contemplated above, then it is also important to consider whether 10% or more of the issued securities of the Seller have been transferred (other than by transfer between or among related or inter-related persons) within the period of 24 months immediately before the date of a particular transaction or offer.
Should there have been a transfer as contemplated in the aforesaid, then the Seller will be regarded as a “regulated company” that is entering into an “affected transaction”.
The Companies Act, 2008, stipulates that the Seller may not dispose or give effect to an agreement to dispose of all or the greater part of its assets or undertakings unless the TRP has issued a compliance certificate or exempted the transaction.
5. FINANCIAL ASPECTS
RETENTION OF DEPOSITS AND ROUWKOOP PROVISIONS
It is common to see a clause in a sale agreement providing that, if the Purchaser breaches the agreement and the Seller cancels the agreement as a result, the Purchaser will forfeit his/her deposit as rouwkoop. This is an incorrect use of the concept of rouwkoop.
A rouwkoop clause must be distinguished from a penalty clause.
The rouwkoop clause –
- In essence, a rouwkoop clause is a clause in an agreement that entitles a party to that agreement to pay an agreed sum of money in order to be allowed to withdraw (or purchase his/her freedom) from the agreement.
- If a Purchaser in an agreement containing a rouwkoop clause withdraws from the agreement and pays the agreed rouwkoop amount, the Purchaser will be acting in accordance with the terms of the agreement and his/her withdrawal will not amount to a breach of the agreement.
- The rouwkoop clause will not be subject to the Conventional Penalties Act,1962.
A penalty clause –
- A penalty clause comes into operation where there is a breach of the agreement.
- In terms of our case law (see Mathews v Pretorius (1984) (3) SA547W) and the Conventional Penalties Act (Act 15 of 1962) (“The “Act”) any penalty or liquidated damages contained in a contractual obligation shall be subject to the provisions of the Act.
6. SUSPENSIVE CONDITIONS
Suspensive conditions are generally misunderstood. Most agreements relating to the Sale of Immovable Property do contain suspensive conditions and a brief discussion may be of assistance.
The matter of Mia v Verimark Holdings (Pty) Ltd (522/08) [2009] ZASCA 99 (18 September 2009), provides guidance –
“The conclusion of a contract subject to a suspensive condition creates ‘a very real and definite contractual relationship’ between the parties. Pending fulfillment of the suspensive condition the eligible content of the contract is suspended. On fulfillment of the condition the contract becomes of full force and effect and enforceable by the parties in accordance with its terms. No action lies to compel a party to fulfill a suspensive condition. If it is not fulfilled the contract falls away and no claim for damages flows from its failure…”
Key points on suspensive conditions –
- On the signature date, a contractual relationship is still created, even if the contract contains a suspensive condition – This means that neither party can unilaterally resile from the contract.
- A suspensive condition suspends the full operation of the obligation and renders it dependent on the uncertain future event.
- On fulfillment of the condition, the contract becomes of full force and effect (provided that there are no other suspensive conditions).
- A suspensive condition must be fulfilled in its entirety unless the parties intended that fulfillment of part of the condition should lead to the enforce-ability of a part of the contract
- A condition intended to be for the benefit of one party may only be waived by such party before the time for fulfillment of the condition has expired (for example – where the Purchaser requires a bond approval suspensive condition, waiver needs to take place before the date that the suspensive condition must be fulfilled).
- If the condition is not fulfilled within the provided time-frame, the contract falls away (in other words – the contract is annulled retrospectively).
- You cannot force a party to fulfill a suspensive condition unless the contract provides otherwise. An exception to the aforementioned relates to the doctrine of fictional fulfillment –
- where the one party has deliberately prevented the fulfillment of the condition. In that event, unless the circumstances show an absence of dolus (intent) on the part of that party, the condition will be deemed to be fulfilled as against that party and a claim for damages for breach of the contract is possible.
- This means that the defaulting party will have to perform his obligations just as if the contract had never been subject to a suspensive condition at all.
- If he does not perform his obligations, he may be liable for damages resulting from his breach of contract.
A matter that deals specifically with the doctrine of fictional fulfillment and the sale of an Immovable Property is that of Binta v Hlasela and Another (1776/2016) [2017] ZAECPEHC 35.
In order to successfully invoke the doctrine of fictional fulfillment, a claimant must show that there was:
(a) non–fulfillment of the condition;
(b) the other party breached his duty with an intention to frustrate the fulfillment, and
(c) there was a causal link between (a) and (b).
7. TAX CONSIDERATIONS
VAT OR TRANSFER DUTY
As a point of departure:
- establish whether or not the Seller is a VAT vendor; and
- if the property is used by the Seller to produce income that is subject to VAT.
If the above-contemplated requirements are not met, then the transaction will likely be subject to transfer duty.
SARS has provided a comprehensive guide on transfer duty – SARS Transfer Duty Guide. If you do not often draft agreements of sale relating to immovable property, we suggest that you work through the SARS Transfer Duty Guide.
SECTION 35A OF THE INCOME TAX ACT (“ITA”)
In terms of section 35A of the ITA there rests a duty to withhold tax on the sale of land belonging to a non-resident of South Africa.
Section 35A does not apply if the amount payable by the Purchaser to the Seller in respect of the acquisition does not exceed an aggregate of R2 million. i.e. the section does not apply if the purchase price is less than R2 million.
Where the non-resident Seller is
- a natural person, 7.5% must be withheld
- a company, 10% must be withheld
- a trust, 15% must be withheld
Where the Purchaser knew or ought to have known that the Seller is a non-resident, and fails to so withhold the amount, that Purchaser is liable to pay the amount to SARS, with interest and penalties, where late payment is made.
Where the Seller is a non-resident, the estate agent, if any, and the conveyancer who assists in or administers the transaction must each notify the Purchaser in writing before payment is made to the Seller that this section may be applicable.
If the estate agent and/or conveyancer knew or ought to have known that the Seller is a non-resident, and then fails to warn the Purchaser in writing, then that estate agent and/or conveyancer will be jointly and severally be liable for the amount, however, limited to the amount of the remuneration it would have received.
ZERO RATED TRANSACTIONS
- In order for a property to be sold as a going concern, the following factors have to be present and included in the agreement of sale:
- The Seller must be a registered VAT vendor
- The Purchaser must be a registered VAT vendor
- The property must be an income earning activity and the parties must agree in writing that the property will constitute an income earning activity on the date of registration of transfer
- The sale of the property must include all the assets which are necessary for carrying on the income earning activity
- The Seller and Purchaser must agree in writing that the transaction is a zero-rated VAT transaction and therefore the purchase price is inclusive of VAT at the rate of 0%.
For more information on the tax considerations have a look at interpretation note 57 issued by SARS –
Draft SARS interpretation note 57 (issue 2)
8. CONCLUSION
For many people, the purchase of an Immovable Property will likely be the most expensive item that they will ever purchase. Making sure that this agreement takes into account the various legislation impacting on the Agreement as well as applicable tax considerations, is essential.
In the next article, our focus moves to more specific clauses that are usually contained in an agreement of sale relating to immovable property.
See also:
- The CPA and drafting of agreements relating to immovable property
- Post COVID-19 property market solutions
- #Covid19 – What are landlords and tenants to do now?
- Contract Law: Applying the abstract theory in property transfers
